From: Chris W. McDonald [mailto:cwm@keyknife.com] 

Sent: Thursday, November 11, 2010 1:53 PM 

To: EBSA, E-ORI - EBSA 

Subject: Definition of Proposed Fiduciary Rule

The proposed revised definition of a Fiduciary in relation to required annual enterprise

valuations will cause harm to Employee Stock Ownership Plans in violation of law.   

The law specifically states:

90 Stat.1520, P.L. 94‐455 Section 803

(h) Intent of Congress Concerning Employee Stock Ownership Plans. – The Congress, in

a series of laws (the Regional Rail Reorganization Act of 1973, the Employee Retirement

Income Security Act of 1974, and the Tax Reduction act of 1975) and this Act has made

clear its

interest in encouraging employee stock ownership plans as a bold and innovative

method of

strengthening the free private enterprise system which will solve the dual problems of

securing

capital funds for necessary capital growth and of bringing about stock ownership by all

corporate

employees. The Congress is deeply concerned that the objectives sought by this series

of laws

will be made unattainable by regulations and rulings which treat employee stock

ownership plans

as conventional retirement plans, which reduce the freedom of the employee trust and

employers

to take the necessary steps to implement the plans, and which otherwise block the

establishment

and success of these plans. (Pub. L. 94‐455, 90 Stat. 1520)

In the Department of Labor’s Proposed Regulation, 29 CFR Part 2510 RIN 1210–AB32

Definition of the Term ‘‘Fiduciary’’, it appears that the solution for very specific past

abuses is an across the board reduction of freedom of ESOTs and sponsoring companies

to take the necessary steps to implement plans and would have the effect of blocking

the establishment and success of these plans.  This is akin to a doctor prescribing a

powerful antibiotic that negatively affects the body’s entire immune system and has

significant negative consequences, when a targeted remedy for the specific ailment

could and should be prescribed.  This would be considered malpractice by a physician

and should be considered malpractice when a similar regimen is prescribed by the DOL.
Employee Stock Ownership Trusts have at least one Fiduciary by existing regulation in

the form of a Trustee.  These Trustees are required to carry insurance coverage to

reflect the high level of responsibility and the rigorous legal standard by which their

decisions are judged.  Reliance on the opinions or advice of an independent and

impartial adviser or consultant, does not reduce the Trustee’s liability or serve as an

affirmative defense to charges of misconduct or lack of prudent decision‐making.  The

Fiduciary of the Trust is ultimately responsible.  In cases where imprudent decisions

were made that harmed Plan participants or their beneficiaries, it is the Trustee that is

ultimately and solely responsible.  The proposed regulation would dilute the Trustee’s

responsibility.

Additionally, there will be financial harm caused to the Participants of such plans due to

higher costs of Plan Administration.  The Fiduciary insurance required for an

independent valuator, who should already meet very rigorous standards if the Trustee is

performing their job properly, will only increase the cost to perform the required annual

ESOP valuations.  In the vast majority of ESOP’s, expenses will go up, reducing plan

assets and benefits of participants, and will not serve to further protect the Plan

Participants at all.  There may also be a reduction in the number of appraisers who are

willing to work with ESOPs due to increased liability and the negative consequences in a

litigious society.  Lack of appraisers and higher costs would serve to block establishment

of ESOP’s, that may otherwise be viable, in violation of the above highlighted

Congressional concern.

The Trust for which I am responsible saw the negative financial effects of application of

the Fiduciary definition first hand.  When seeking an Independent Trustee to determine

if it was prudent to exercise an option, we were given a price of $5,000‐$10,000.  When

it was determined that the advisor would be considered a Fiduciary, the cost more than

doubled to $20,000‐$25,000.

The DOL already has a responsible party to hold accountable in the form of the Trustee.  

A greater focus on holding Trustees to the existing standards of prudence would be

more beneficial than merely making more parties responsible and increasing costs.  The

use of the term “Investment Advisor” is typically used in conventional retirement plans

and is being erroneously applied in this proposed regulation to cover annual appraisals,

again in violation of the Congressional concern.

At a minimum, in the proposed regulation there should be an exemption to the

Fiduciary definition for appraisers who are merely determining the value of the shares

that are allocated to Plan Participant accounts annually.  The application of

“investment advice” in this instance is a stretch at best.  This exemption would reduce

the overall cost of maintaining an ESOP.   

There is still a responsible party charged with ensuring that the participant’s interest are

foremost in the person of the Trustee.  As noted in the Supplementary Information in
the proposed regulation, “The Employee Retirement Income Security Act of 1974

(ERISA) is a comprehensive statute designed to promote the interests of participants in

employee benefit plans and their beneficiaries by establishing standards of conduct,

responsibility, and obligation for fiduciaries of those plans.  ERISA imposes a number of

stringent duties on those who act as plan fiduciaries, including a duty of undivided

loyalty, a duty to act for the exclusive purposes of providing plan benefits and defraying

reasonable expenses of administering the plan, and a stringent duty of care grounded in

the prudent man standard from trust law.”  The standards of conduct, responsibilities,

and obligations of an ESOP fiduciary belong with the Trustee who is truly the only

person that can abide by the rigorous standards set forth.  There is a named Fiduciary in

the Trustee, the DOL needs to look no further in determining responsibility.

Respectfully,

Chris McDonald

Trustee

Key Knife, Inc. Employee Stock Ownership Trust

503‐403‐2048

cwm@keyknife.com

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